HSBC recently announced that it has reached a definitive agreement to settle its long-standing mortgage issue with the U.S. Department of Justice (DoJ) for $765 million. HSBC held out on talks with the DoJ over its mis-selling of residential mortgage-backed securities worth billions of dollars in the run-up the 2008 recession, unlike its U.S banking peers who rushed to reach a settlement over 2013-2015. However, the settlement looks like a relative bargain for the geographically diversified banking giant, as every one of its peers paid a higher fee figure as a proportion of total securities allegedly mis-sold.

To put things in perspective, the FHFA estimated the total size of RMBS mis-sold by HSBC over 2005-07 to be $6.2 billion. So the final settlement amount of $765 million is 12% of the value of problematic securities. This compares to the average figure of 32% for all banks that settled with the DoJ over 2013-16. Notably, HSBC has already set aside enough cash to cover the settlement amount. Accordingly, the deal is not going to impact HSBC’s results for Q3 2018 or full-year 2018. Because of this, we stick to our $56 price estimate for the bank’s shares as detailed in our interactive valuation dashboard for HSBC. Our price estimate is roughly 30% ahead of the current market price for the bank – something that can be primarily attributed to the recent decline in the shares of European banks.

This table summarizes the final amount each of the largest global banks agreed to shell out to settle the legacy RMBS issue with the DoJ over the years. It should be noted that some of the settlements also include other U.S. regulatory and enforcement agencies (like the Attorneys General for several U.S. states), and customer relief agreements – which did not entail direct cash flows for the banks but had a direct impact on the banks’ loan portfolios and/or income from loans.

Trefis

As seen here, HSBC will pay the lowest settlement amount among the 11 banks that have settled with the DoJ over the years. Notably, four non-U.S. banks held out of early settlement talks with the DoJ – Barclays, RBS, HSBC, and UBS. And now three of them have reached an agreement with the DoJ this year, with all banks (except for UBS) inking a favorable deal. While HSBC will pay the lowest settlement as a proportion of mis-sold securities, RBS’s settlement amount of $5.4 billion also stands out as it represents a figure less than half of what analysts estimated. After all, RBS was one of the biggest originators of RMBS in the pre-recession era, and the settlement proportion of 18% was the lowest until the recently announced HSBC deal.

It would therefore appear that these banks’ decisions to delay settlements worked in their favor after all, as improved market sentiment and a more favorable U.S. administration resulted in notably lower fines. What remains to be seen is how soon UBS inks the final deal with the DoJ, and for how much.

Led by MIT engineers and Wall Street analysts, Trefis (through its dashboards platform dashboards.trefis.com) helps you understand how a company's products, that you touch, read, or hear about everyday, impact its stock price. Surprisingly, the founders of Trefis discovered...